Effect of Funding Sources on Lending Patterns of Banks in Ghana

Abstract

This study set out to investigate the effect of funding sources on the lending patterns of banks in Ghana. Using a large and representative sample of 22 banks operating in Ghana from 2005 to 2011, the study investigates the funding sources, the lending patterns of banks in Ghana as well as the effect of funding sources on lending patterns.The study made use of a panel data methodology using a panel corrected errors estimation technique. The findings of the study indicate that deposits comprise the majority of funding sources while non deposit funding sources and internal funding follow in that order. On lending patterns of banks in Ghana, the study finds that most of the loans are allocated to the tertiary sector followed by the secondary sector with the primary sector lagging behind. Additionally, the regression results show a positive and significant relationship between lending to the primary economic sector, the tertiary economic sector, total lending and deposits. Furthermore, the findings suggest that in Ghana, bank loans to the primary and secondary sector are financed by internal funds. The study gives rise to very important policy recommendations. The study recommends that policy makers should put in placepolicies that would make it more attractive for banks to channel more of their lending to the primary economic sector especially as their deposits increase.